Bell Resources Ltd v. Broken Hill Pty Co Ltd

[1986] ATPR 47-658

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(Judgment by: Smithers)

Re: Bell Resources Ltd. & Bell Resources Holdings Pty. Ltd.
And: The Broken Hill Proprietary Company Limited; James Schofield Balderstone and Brian Thorley Loton

Court:

Judge:
Smithers

Judgment date: 27 May 1986

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Judgment by:
Smithers

The applicant alleges against the respondent company The Broken Hill Proprietary Company Limited (BHP) and the two personal respondents that on 21 March 1986 the company engaged in conduct that was misleading and deceptive and in contravention of the provisions of s. 52 of the Trade Practices Act 1974 and that the personal respondents aided or procured such contravention.

The conduct in question was the communication by the respondents to the shareholders of BHP of a forecast that the profit of BHP for the year ending 31 May 1987 would be $980 million under cover of a letter dated 21 March 1986 from the first personal respondent. The applicants seek relief against the company and also against the personal respondents who are respectively Chairman of Directors and Managing Director of BHP. The letter was in the following terms:

"FROM THE CHAIRMAN

21 March 1986

Dear Shareholder

BELL TAKEOVER ATTEMPT I am writing to you again to bring you up to date with the Bell attempt to gain defacto control of BHP.

It is very difficult to give you the latest information because the situation changes almost daily. Even as I sign this, events may be moving on.

We appreciate that the uncertainty and lack of information is extremely difficult for shareholders. However, while the matter is before courts, all of us at BHP have been restricted in what we can say in public.

Before you have any real decision to make we will ensure that you have all the relevant information at our disposal. If and when Bell sends you a formal takeover offer, we will straightaway answer it in detail.

To alleviate widespread uncertainty and market instability the directors recently released a forecast of the short term profitability of the BHP Group. A copy of that important profit forecast is attached.

The announcement of the Company's profit for the quarter ended 28th February and for the first nine months of the current financial year confirms that we are right on target towards achieving the forecast annual result. Your directors are convinced that the direction in which the Company has been and is going will benefit shareholders most. The Company is performing strongly as a result of sound, long term strategic investments.

For your assistance we have set up 'BHP Access Line' - a shareholder enquiry service, on 008038130. You can telephone this number by dialling it from Melbourne or anywhere else in Australia for the price of a local call.

To the hundreds of shareholders who have written to us or telephoned, thank you for your support and confidence.

Yours sincerely,

(signed)

James Balderstone."

The forecast, so far as is relevant was in the following terms:

"RELEASE

Dated 28 February 1986

Released 3 March 1986

PROFIT FORECAST

Near term profit outlook

In the current situation of uncertainty and market instability arising firstly from Bell Resources' announcement of its intention to make a partial bid for the Company, and secondly from the recent steep decline in world oil prices, the Directors have decided to announce their forecast of the short term profitability of the BHP Group. They believe that this unusual step is desirable in the present circumstances so that shareholders and the investing public can be adequately informed.

Summary of financial results

BHP GROUP NET PROFIT

(Rounded to nearest $ million)

(Before excluding minority interests and before extraordinary items)

Years ending 31 May

	Actual		Forecast
Business Group	1984	1985	1986	1987
BHP Petroleum	426	485	525	394
Utah International	10	140	178	169
BHP Minerals	84	72	145	146
BHP Steel International	124	165	262	306
	644	862	1,110	1,015
Corporate items & Investments	(5)	(88)	(85)	(35)
BHP Group net profit	639	774	1,025	980

SALES REVENUE

(Rounded to nearest $ million)

Years ending 31 May

	Actual		Forecast
Business Group	1984	1985	1986	1987
BHP Petroleum	1,318	1,464	1,578	1,347
Utah International	168	1,282	1,850	2,067
BHP Minerals	775	847	1,201	1,738
BHP Steel International	2,934	3,159	3,668	3,804
Corporate items & Investments	600	806	1,022	1,168

Year to 31 May 1986

The Group net profit (before excluding minority interests and before extraordinary items) for the year to 31 May 1986 is expected to be some $1,025 million. This level of profit will be an all time record and reflects the overall strength of the Company.

The allocation of the forecast annual result in half years together with a comparison with actual results for the corresponding periods in the year to 31 May 1985 is as follows:

$ million Years ending 31 May

	1985	1986
November half year	367(Actual)	587(Actual)
May half year	407(Actual)	438(Forecast)
	774	1,025

Although the profit in the second half of the 1986 year is expected to be lower than in the first six months it will nonetheless also be a record for this period in any year.

The announcement this week of a reduction in the import parity price for domestic allocated sales of crude oil applicable from 1 March together with the recent significant decline in the prices on international markets has reduced the forecast profit by approximately $60 million.

The net effect of any extraordinary items is not expected to be material.

Year to 31 May 1987

The Group net profit (before excluding minority interests and before extraordinary items) for the year to 31 May 1987 is expected to be $980 million a continuation of the strong profit performance. This forecast result incorporates the impact of an increase in the Australian company tax rate from 46% to 49% and the effect of recently announced changes or proposed changes to Australian tax legislation. These additional burdens adversely affected net profit by some $77 million in the period.

The forecast assumes a severe reduction in crude oil prices from those prevailing for most of the current year; an average price of US$18.00 per barrel has been adopted. For every US$1 per barrel change in the average price of all crude oil sales for the year, the Group's net profit will vary by approximately, A$24 million.

The forecast has been based on an assumed average exchange rate of A$1 = US$0.65. Approximately 50% of the Group's sales revenues are US dollar or US dollar related and a 1 cent movement in the average A dollar/US dollar relationship for the year should affect the 1987 annual profit by approximately A$15 million. The net effect of any extraordinary items is not expected to be material.

Basis of forecasts

The forecasts have been made on the basis of the following:

•

continuation of existing businesses with no current intention for acquisitions or disposals which are likely to materially affect the forecasts.

•

an analysis of each of the factors affecting the profitability of each Business Group (Key factors are specifically referred to in this release.)

•

continuation of key elements of expenditure such as repairs and maintenance and research and development at recent levels and appropriate to forecast levels of operations throughout the Group.

•

the Group's normal planning and budgeting procedures.

•

continuation of existing marketing arrangements including sales under significant long term contracts.

•

present tax regulations in Australia and overseas varied to incorporate already announced proposed changes to Australian tax legislation.

•

no significant variations in the existing levels of inflation in those countries where BHP operates.

•

no changes have been made to previously adopted accounting policies in arriving at the forecasts.

The composition of Business Groups and Corporate items and investments is in accord with the Group Annual Report for 1985 and subsequent profit announcements.

The Directors consider the following comments on the anticipated results of individual business Groups in 1987 may assist in an understanding of the forecasts. BHP Petroleum

It has been assumed that the average price for crude oil over the year will be US $18.00 per barrel. This compares with an average import parity price of US$27.60 per barrel for the current year to date.

Bass Strait crude oil production is expected to average 430,000 barrels per day of which BHP will be entitled to 50%. This compares with average daily production for the current year to date of 496,000 barrels per day. While there is potential to increase production levels, there is no financial incentive to do so at low export prices. Reservoir factors are also expected to limit production. It is assumed that domestic producers will continue to take 350,000 barrels per day (BHP share - 175,000 barrels per day) as currently required by the Government and the balance of production will be sold on a spotbasis as at present.

The Jabiru field is expected to commence production in July 1986 at 13,000 barrels per day (100% terms). Production rates are expected to be enhanced towards the end of the year by the drilling of an additional well.

The domestic phase of the North West Shelf project is assumed to operate with no major interruptions to supply, and sales to SECWA are estimated to be in line with 1986 demand.

There are no major projects currently planned to come on stream during 1987 other than the Jabiru field. However, the recent discovery at Challis could lend itself to the rapid development technique applied to Jabiru.

The Petroleum Group will continue a vigorous exploration programme in the more prospective areas but expenditure will be lower in 1987. The amount forecast to be charged against profits in 1987 is $82 million and this compares with the current estimate of $133 million in 1986.

Utah International . . .

BHP Minerals . . .

BHP Steel International . . .

Corporate Items and Investments . . .

Signed for and on behalf of the directors.

James Balderstone	B.T. Loton
Chairman of Directors	Managing Director

28 February 1986

The applicants will succeed in this proceeding if they establish on a balance of probability that the letter and forecast taken together convey to the mind of an ordinary person being a shareholder in the Company something which is not true. And of course a message may be conveyed by express words or by implication.

In view of the non-specific manner in which the alleged misleading and deceptive conduct of the respondents is described in the Statement of Claim the applicants' counsel was requested to supply to the Court particulars stating in specific terms the misrepresentations said to be involved in the letter and forecast. In response the applicants in their formulation of the representations said to be made in the letter and forecast allege that the letter and forecast carry to the mind of shareholders the following assertions which are not true, namely:

(a)

BHP was providing to its shareholders the latest available information to enable them to evaluate BHP's short term profitability;

(b)

it was providing to its shareholders adequate information to enable them to evaluate BHP's short term profitability;

(c)

the information which BHP had which it was providing to its shareholders was adequate to alleviate the concern they may have concerning the widespread uncertainty and market instability caused by the Bell Resources takeover offer and the recent steep decline in world oil prices;

(d)

the BHP group net profit for the year to 31 May 1987

(i)

was expected to be $980 million;

(ii)

was calculated on the basis of the latest relevant information;

(e)

the BHP group net profit for the year to 31 May 1987 was arrived at after taking full account of the recent significant decline in crude oil prices;

(f)

the BHP group net profit of $980 million was based upon

(i)

expected average exchange rate and oil price assumptions of US0.65 and $US18 respectively ("the assumptions") for the forecast period;

(ii)

conservative assumptions which were reasonably certain, reliable, predictable and were competently researched, calculated and arrived at;

(iii)

assumptions which were probable outcomes for the period;

(g)

any relevant information known to BHP which would cast doubt on the certainty, accuracy or reliability of the forecast or the assumptions was provided to shareholders in the forecast.

It is convenient to deal with the representations so formulated at this stage.

As to (a) and (b) it is my view that there is no foundation for the suggestion that in the letter or forecast BHP was representing that it was providing the latest information or adequate information, or any information to enable shareholders themselves to evaluate BHP's short term profitability. The letter and forecast constituted a statement of BHP's expectations as to the profit in question and indicated the basis on which its expectation was based. But it did not in any way suggest that the shareholders would find in the forecast the latest information available to BHP or information which would enable them to evaluate for themselves BHP's short term profitability or likely profitability.

As to (c) it is my view that in the letter and forecast the representation is made that the forecast is intended to alleviate uncertainty and market instability caused by the Bell Resources takeover offer and the recent steep decline in world oil prices and that in the view of the respondents the forecast will do that. This representation was not untrue. There is no representation that there is sufficient factual information in the letter and forecast to remove or even alleviate the uncertainty and instability. The contemplated alleviation is to be achieved by the statement of the respondent's expectations. On the basis that the forecast was honest and reasonably based none of the representations was untrue.

In the context that the first applicant was seeking to gain control of the whole of the BHP undertaking by the method of making a partial and conditional bid to shareholders, the profit to be expected for the year 1 June 1986 to 31 May 1987 was a material factor to be taken into account by shareholders both for as an indication of future profitability and as an indication of the total value of the assets and prospects of BHP. In the climate of uncertainty on these matters, and the inevitable lack of knowledge of the multitude of facts relevant thereto, the publication by BHP of its view as to the expected profit for 1986-87 was a reasonable step. It would constitute a factor calculated to alleviate, not of course to remove, the uncertainty. Indeed it is a reasonable view that the directors of BHP had a duty to make such a statement, and to make it, not conservatively as is suggested, but as near to reality as was possible. Just as they were under a duty not to exaggerate the expected profit, so they had a duty not to state their forecast at a figure lower than that at which they truly believed to be the correct figure. Of course they could not state what the profit would be. Obviously, a vast number of possible occurrences unknown at the time of the forecast would affect the actual result. This would be obvious to the ordinary shareholder. But commercial decisions have to be made by judgment recognising the existence of unknown possibilities and giving those factors such weight as is reasonable. Commercial decisions have to be made by commercial men in a myriad of transactions from day to day on that basis. And it would certainly be of value to shareholders to know what BHP itself thought the future results would be. It had much commercial experience, whereas most shareholders would be likely to have had but little. Shareholders were forced by the terms of the proposed offer to make a fairly swift commercial decision in which they were for the most part without relevant information.

The consequence of passing to a bidder shares the true value of which they were not equipped to assess and on a partial and conditional basis, transferring to the bidder the control of all the assets in the company with unknown effects upon the value of the shares not pu rchased by the bidder, put shareholders in a serious dilemma. In these circumstances a profit forecast by BHP was calculated to alleviate the uncertainty and instability in the market caused by the Bell Resources takeover offer and the recent steep decline in world oil prices.

As to (d)(i) the letter and forecast does assert that it was the expectation of the respondents that the group net profit for the year to 31 May 1987 was expected to be $980 million. There is no evidence that this was untrue.

As to (d)(ii) the letter and forecast do impliedly assert that the forecast was made after consideration of all the relevant information in the possession of BHP and the exercise of judgment as to future possible developments. In no other sense do they assert that the forecast was calculated on the basis of the latest relevant information. It is not shown that the implied assertion was untrue.

As to (e) the letter and forecast do assert that the forecast net profit for the year to 31 May 1987 was made after taking full account of the recent significant decline in crude oil prices. There is no evidence that this was not true.

In making it clear that the recent fall in oil prices had been considered, the forecast must have played an alleviating role by assuring shareholders that it was the 1986-87 prices that were important rather than those of March 1986.

As to (f)(i) it is clear that the representation in part (i) of para. (f) above was made. It is not shown to have been untrue.

As to (f)(ii) it is my view that the shareholders would understand that BHP had made assumptions which were neither conservative nor liberal but which represented its best effort to express the reality of its expectations. It is clear from the terms of the forecast that the assumptions on which it was made were but assumptions which might turn out to be erroneous. The representation alleged was not made. The letter and forecast did not, in my opinion, represent that the profit forecast was completely researched, calculated and arrived at. No doubt shareholders would understand that the forecast expressed the expectation of the respondents reached after the exercise of such diligence as BHP thought necessary to provide shareholders with a reasonably reliable forecast. The representations which were made, relating to the matters raised in para. (f)(ii) are not shown to have been untrue.

As to (f)(iii) no representation was made as to the probable profit result for the period. A representation was made as to the expectation of BHP as to that outcome. That is not shown to have been untrue.

As to (g), it is my view that no representation is to be found in the letter and forecast that information known to BHP which would cast doubt on the certainty, accuracy or reliability of the forecast or the assumptions upon which it was made, was provided to shareholders therein. No doubt there is a representation that the forecast is made after consideration of all the relevant information in BHP's possession in whatever direction such information would point. But a forecast is but a statement of expectation and it was presented as such. It inherently proceeded on the basis that factors pointing in various and even opposite directions might have existed and had to be considered in the formation of the respondents' assessment of the forecast profit.

The forecast was put forward merely as the forecast of the company. Those concerned were told the assumptions of price and exchange rate that had been "adopted", and what the effect on the forecast would be if the adopted price or adopted exchange rate did not accord with the actual average price and rate during the forecast period.

Shareholders would not be induced to draw the inference that the current oil price was not less than $US18.00 and the current exchange rate was not in excess of $US0.65 to $A1.00. If shareholders had been informed that the current oil price was $US11.80 and the current exchange rate was $US0.71 to $A1.00 they might have been caused to wonder whether the assumptions made in the forecast were soundly or wisely made. But such information by itself would have been useless and misleading to the shareholders. Without a dissertation as to the relative lack of significance of the current prices and exchange rate in relation to those expected to obtain during the forecast period and factors tending to support the views of the respondents, the information could not but confuse or mislead shareholders. The forecast was not put forward as a statement of factors relevant to the forecast but as the company's conclusion for commercial purposes after consideration of all the factors commercially relevant.

The applicants contend that the inference must or ought to be drawn that no competent person acting with a proper sense of responsibility could have reached the conclusion expressed in the forecast. As pleaded the case for the applicant is that readers of the letter and forecast would understand therefrom that the letter and forecast contained the latest information relevant to the profit forecast for the years ending 31 May 1986 and 31 May 1987 , but that the letter and forecast omitted facts which would materially qualify the validity, accuracy and utility of the forecast.

The case most strongly presented for the applicants was that the letter and forecast were misleading to shareholders because the tone was optimistic and calculated to induce a belief that the forecast was more reliable than it really was. Counsel relied in particular on the statement in the letter that the results of the first nine months of the current financial year were on target and the statement in the forecast that it was published so that shareholders and the investing public could be adequately informed. It is certainly true that the letter is calculated to induce a belief in shareholders that the forecast was one which, in the opinion of the company, would be achieved and that that opinion was firmly held on reasonable grounds. However, reading the two documents as a whole I do not think the note of optimism goes further than this.

But more generally, it was submitted for the applicants that the letter and forecast create an impression that the opinion expressed by BHP is an opinion with which no competent persons were in disagreement. I do not think it does this. This is in line with representation (g) of the alleged representations as ultimately formulated and considered above. It is in line with the more general case sought to be made in the statement of claim. It is there alleged that the letter and forecast were misleading to shareholders because they fail to inform shareholders of recent downward movements in the import parity price of oil, and recent upward movements in the exchange rates. In the statement of claim it is said that such information "would have materially qualified the validity, accuracy and utility of the forecast". But in the forecast BHP did not discuss in detail the factors upon which its opinion rested. Nor did it discuss the basis upon which it adopted $US18.00 as the assumed oil price and US0.65 to $A1.00 as the exchange rate in the assessment of its 1986-87 profit. It did tell shareholders that there had been a recent significant decline in oil prices on international markets. To have informed shareholders of the details of the recent price and exchange movements without explanation would have been likely to confuse shareholders. They would have had to be told the reasons why those particular movements were not thought to throw doubt on the forecast for the year to commence the following June, in other words to have had the evidence in this case put before them. Shareholders would understand that the recent movements whatever they were had been taken into account by BHP in making the forecast as at 3 March, the date of release of the forecast, and that any movement in oil prices and the exchange rate between 3 March and 21 March had been taken into account. This is not shown to have been untrue.

It was said, however, that BHP carried a very heavy responsibility to shareholders in advising them how to make decisions in the takeover situation. Accordingly so it is said any forecast conveyed should only be that which had been most meticulously researched and certainly not such as might erroneously, even if honestly, indicate that acceptance of the partial bid was not in their best interest. But BHP had just as clearly a duty to give assistance to the shareholders in relation to their decision in relation to the bid. In those circumstances, it appears to me that the duty of BHP was to be just as alert to see that the shareholders did not undervalue the prospects of their company as not to overvalue them. It is said that it did not do this, that the forecast was made on inadequate investigation and information.

Oil Prices

So far as the adoption of $US18.00 as the assumed oil price was concerned the figure was chosen by reference to the opinions of Mr. Foster and Mr. Leigh. Mr. Foster was the General Manager of the Petroleum Marketing Division. He joined the company in 1966 as Petroleum and Reservoir Engineer. His experience and activities may be described as follows:

"I am a Civil Engineering graduate of Adelaide University. I am a member of Petroleum Exploration Society of Australia, the Royal Society of South Australia, the Australia and New Zealand Association of Advanced Science, the Australian Marine Science Association, the Geological Society of Australia and the Australian Institute of Energy. In 1972 I received the Royal Society of South Australia Research Grant. I was the President of the Petroleum Exploration Society of Australia in 1972 and 1973, the South West Pacific Regional Program Chairman of the Circum-Pacific conference, Hawaii, in 1974, 1978 and 1982; the Chairman of the APEA Barrier Reef Royal Commission Committee 1970-72; a member of the Council of the Victorian Institute of Marine Sciences, 1980-83; an

Honourary Associate in Geology of the National Museum of Victoria, 1980 to date; I am a member of the Executive Committee of Marine Sciences, 1981-83; a member of the Australian Marine Sciences and Technologies Advisory Council, 1982-85; a director of the Circum-Pacific Council for Energy and Mineral Resources, 1982-85; the Petroleum Exploration Society of Australian Distinguished Lecturer for 1982; a member of the Australian Trade Mission to investigate energy-induced changes in the structure of trade with Japan, 1983; and co-chairman of the Beijing Petroleum Symposium, September 1984. I have published a number of articles and reports including the following:

'Barrier Reef revisited; an appraisal of the Royal Commission Report', APEA Journal, 1975; 'Two studies of the marine environment' AAPG memoir 25, 1976; 'Managing Australia's oil and gas resources' Institution of Engineers Journal 1976, with D.A. Wittwer; 'Long term primary energy prospects and usage patterns' Institution of Engineers Task Force, report of Working Party 1, 1977 with I.W. Meldrum, convenor; 'the Energy Gap in Uranium a fair trial', Alan Manning Ed, for Australian Labour Party 1977; 'Export LNG from Australia's North West Shelf', Gastech, Monte Carlo, 1978; 'a Natural Gas Policy for Australia' CEDA Monograph 54, 1978; 'Alternatives to Alternative Energy' APEA Journal, 1980; 'Reducing our Dependence on Imported Oil' AIE 2nd National Conference, 1980; 'reducing transport fuel demand' 2nd ALP National Seminar on Rural and Provincial Australia, 1980; 'Australian natural gas - a producer's perspective' Monash University Centre of Policy Studies, Conference on Natural Gas in Australia, 1980', 'Australia as a natural gas exporter' AAPG Studies in Geology 12, 1981; 'Review of "Analyzing Demand Behaviour:

A Study of Energy Elasticities" by Douglas R. Bohi' Annals of Regional Science, 1982; 'Oil, government and the revenue', the 1982 PESA Australian Distinguished Lecture, PESA Journal, 1983; 'LPG Supplies for Australia's Future' AGA-ALPGA Conference 1983; 'Report of the Trade Development Council Study Mission to Japan on energy induced changes to the structure of trade' in D. Gastin Ed., 1983; 'Outlook for LNG, LPG and condensate in the Pacific Basin', Gazforum, 1984; and 'Selling Australia's Crude Oil', 13th CMMI Conference, Singapore, 1986. After completing a one year petroleum engineering training course in Holland, I worked in engineering, geological and economic aspects of the oil industry in, amongst other countries, Nigeria, Brunei, Sarawak, Texas, Qatar and Oman in the employ of the Shell Group of Companies. In 1966 I joined BHP as the Petroleum and Reservoir Engineer. My current position with BHP is General Manager Petroleum Marketing. My duties include crude oil pricing which involves supplying forecasts of crude oil prices for the various needs of BHP. I have been forecasting the price of crude oil for BHP since I joined BHP save for some minor intermittent periods. I have been responsible for BHP's crude oil marketing activities since 7th January, 1977. I have participated on behalf of BHP in discussions with various Federal Government departments on matters relating to crude oil pricing since the discovery of the Gippsland oil fields in the late 1960s. Furthermore, in the early 1970's the Federal and Queensland Government initiated Royal Commissions on oil drilling on the Great Barrier Reef. I presented and gave the evidence on behalf of the oil industry on that part of the enquiry dealing with the future of world oil prices."

It is clear that on matters relating to the future commercial developments of oil his opinion is of considerable value. There is no need to doubt Mr. Leigh's statement that if one were to search for the group of persons most expert in this field in Australia he and Mr. Foster would be about the only real candidates.

As a witness it was impossible not to be impressed by Mr. Foster. He answered with meticulous regard for the precise questions he was asked. In every way he impressed me as competent in his field and unquestionably truthful. It was said that the evidence of both Mr. Foster and Mr. Leigh should be discounted because their forecast was made for the internal purposes of BHP and not for publication generally, that they had not directed their minds to the forecast of $18.20 throughout the period June 1986 to May 1987 and that they found themselves in an ex post facto situation in which they had lost their freedom of mind and were bound to accept the forecast which the company had published.

The circumstances were that on 8 January 1986 Mr. Cockburn the Financial Controller of BHP Petroleum, a division of the respondent company, informed the General Manager, Petroleum Marketing (Mr. Foster) by letter:

"RE: 1987 PROFIT BUDGET The Division is currently preparing its Profit Budget for the year ending 31st May, 1987. The budget will be reviewed and reported against on a monthly basis for the ensuing 12 months (i.e. June, 1986 to May, 1987).

To facilitate the preparation of the budget it would appreciated if the following information could be provided by the dates indicated below: . . ."

The information requested extended to the provision of much detailed information including a forecast of import parity and negotiated oil prices together with assumptions for the usual two monthly Government IPP price reviews and a forecast in U.S. dollar prices for Bass Strait crude oil exported. The letter indicated that the information was required no later than 17 February as the Group timetable for the submission of the Profit Budget was considerably tighter than in previous years.

In respect of the short term crude oil price the Petroleum Marketing Division forecast was transmitted to the Financial Controller (Mr. Cockburn) under cover of a letter dated 14 February 1986 in the following terms:

"The attached forecast has been prepared to provide an indication of how the Australian crude oil price might develop through to May 1987.

In view of the present volatility and uncertainty two possible price trends have been provided.

The "recovery" case assumes that a production sharing agreement is reached between OPEC and non-OPEC producers within the next 6 months.

The "no-recovery" case assumes that an agreement cannot be reached within the forecast period."

The forecast itself was in the following terms:

In the first instance the short term crude oil price forecast was, prepared by Mr. Leigh on the basis that a relevant agreement would be reached between OPEC and non-OPEC producers within six months. However, Mr. Foster told Mr. Leigh that he thought it would be prudent that they should submit the forecast also on the basis that no such agreement was reached. Mr. Foster indicated to Mr. Leigh that on the basis that no such agreement was reached, his opinion was that the figure of about $18.00 was an appropriate figure for the forecast period.

The forecast made on the assumption that an agreement was reached was called "recovery case" and that on the assumption that no such agreement was reached was called "no recovery case".

When the short term crude oil price forecast was prepared it was believed by Mr. Foster and Mr. Leigh that, for the purpose of fixing the import parity price (IPP) the Commonwealth Government intended to adopt a new bench mark because the benchmark theretofore adopted had become inaccessible and unrepresentative. The IPP Australian dollar price would reflect the conversion of the base price or bench mark from US dollars, subject to minor adjustment by way of addition of notional transport costs and subtractions on account of other minor matters. Discussions had taken place between the Government and representatives of the oil industry including BHP. BHP had made representations to the Government that it would be appropriate to adopt the recorded weekly prices in the Asian Petroleum Price Index (APPI) as the base price. Mr. Foster and Mr. Leigh believed that that price would be adopted as the base price. On 14 February 1986 when the forecast was finalized the APPI prices for 7 and 14 February were before them. They used the average of those two prices as the basis of the forecast for March to May 1986. For the "recovery case" that figure was increased in respect of each succeeding two monthly period. But for the "non-recovery case" that figure was retained for the whole of the forecast period up until 31 May 1987 . The adoption of periods of two months for this forecast reflected the fact that at the time it was prepared the IPP was fixed by the Government on a two monthly basis.

On 24 February 1986 the Government announced that as from 1 March 1986 it would not adopt the APPI published prices but a basket of Middle East prices. The result was that a figure of $US16.77 per barrel became the base figure for calculation of the IPP. The Government announced that for the time being it would retain its regular two monthly reviews of IPP, the next review being due in mid-April with effect from 1 May. Mr. Cockburn thought it wise to anticipate that the base figure of $US16.77 would continue for the following May and June. He calculated that the effect of this upon the forecasted $18.20 for the twelve months to 31 May 1987 produced an average for the year of $18.08. But about 20% of BHP oil production was not sold on the Australian market at the IPP price but overseas. Mr. Cockburn ascertained from Mr. Leigh the anticipated average price receivable for the oil so sold overseas during the forecast period. That price was $US17.70 per barrel. From this data Mr. Cockburn calculated that the return to BHP on oil sold during the forecast year would be at IPP calculated on the base rate of $US18.08 for the 80% of the oil sold in Australia and at the rate of $US17.70 for the oil sold overseas. The mean rate was therefore $18.01 which Mr. Cockburn translated into $18.00 as the base price adopted for the purpose of the forecast. This he translated into dollars Australian for the year on a monthly basis into an expected return at anticipated IPP prices for domestic sales and the overseas price for overseas sales as follows, namely, for each of the months March to June 1986, $A27.09 and for July to May 1987 $A31.23. The Petroleum Division reported to Head Office accordingly.

It was the forecast of Mr. Foster and Mr. Leigh, so adjusted, which was adopted by Mr. Cockburn and the Board for the budget and for the purpose of the profit forecast adopted on 28 February and as published on 21 March.

There is no evidence that this view of future oil prices was not the genuine belief of the Board including the personal respondents. They would have every reason to believe their officers who were well qualified to make the required commercial judgment of future prices. Whether there were reasonable grounds for the expectation that the base price would average $US18.00 during the forecast year depends upon the honesty and validity of the reasoning applied by Mr. Foster and Mr. Leigh. As to the honesty of their forecast there can be no doubt. As to its validity, the suggestion of the applicants is that the figure of $US18.20 was an automatic projection of the APPI average for the two February weeks and was adopted for the balance of the forecast period by Mr. Foster and Mr. Leigh without the exercise of judgment referrable to possible price movements during the balance of the forecast period. However, it would be surprising that persons in their position and with their competence would do this. It is said by the applicants that they did not need to exercise such judgment because they knew that there were to be monthly reviews in the finance department of the oil price movements. But the review did not extend to the review of the forecast. It was the responsibility of Mr. Foster and Mr. Leigh to provide the forecast for the purpose of the budget and for reliance by the other departments of BHP, and indeed the Board, in making decisions as to the conduct of the business of the company. Mr. Foster and Mr. Leigh would certainly not be relieved of any responsibility in the matter of their forecast by the fact that from month to month the financial arm of the company reviewed actual prices. If that factor had any relevance it would tend in the opposite direction, but I think it had none.

Mr. Foster and Mr. Leigh were well aware that they carried full responsibility for the forecast for the whole of the forecast period for all purposes of the company and, in my view, the notion that they relaxed their diligence in any way by reference to the monthly reviews is not sound. Reliance was placed by the applicant on the circumstance that the actual formulation of the "no recovery" forecast was carried out by Mr. Leigh on a day when he was preparing to leave to travel overseas. I do not consider that this factor reduces the value of the forecast. The figure of about $US18.00 was initially the product of Mr. Foster's judgment. The $US18.20 figure was chosen as the starting point as that price was adopted in the recovery case for the opening months on the basis mentioned above. For conformity with that opening figure $US18.20 was appropriate for the opening figure of the "non-recovery" forecast price. That figure was about $US18.00 as proposed by Mr. Foster. Mr. Leigh thought it appropriate to adopt that figure for the whole of the forecast period and Mr. Foster accepted the additional twenty cents. That odd twenty cents was a matter of small significance in the exercise being performed by the two men. It is to be observed that there can be no suggestion that with reference to the "recovery case" the minds of the forecasters were not directed to the considerations that might affect it during the period.

It is said that Mr. Leigh's letter of 14 February 1986 is in a cautious form and is but a qualified forecast. It is my view that the words on which this comment is made are in the form they are, merely because a forecast is in essence merely a statement of what is expected to happen in a future beset by uncertainties calling for the exercise of judgment, and not susceptible of expressions of certainty. Despite the words in question the letter and the forecast therein unequivocally constitute the forecast of the Petroleum Marketing Division. I accept the evidence that it was intended as such and to be taken as such. The view contained in that forecast, without any equivocation, remains the view of Messrs Foster and Leigh as at the date they gave evidence in this proceeding.

It is said also that the absence of written calculations or memoranda with reference to the ascertainment of the forecast figures indicates that the figures were adopted without the appropriate degree of care and consideration. It is necessary, however, to remember that current and future oil prices are part of the daily consideration of Mr. Foster and Mr. Leigh for the purpose of formulation of company policy in respect of its business affairs. The relevant factors are inevitably constantly in their minds.

In addition a forecast of the prices at which oil would be bought and sold months ahead was inevitably one of judgment based on experience and knowledge of the oil scene rather than calculation. I do not infer any lack of diligence or care in the exercise of judgment by Mr. Foster or Mr. Leigh in the making of the forecast. Mr. Foster in particular impressed me as a most knowledgeable, and intelligent professional who realised the importance of his forecasting role, was competent to perform it and one who would have scorned to approve a forecast which he might not have adequately considered. I consider that Mr. Leigh was a truthful witness and competent for the task of making the forecast. Both he and Mr. Foster deposed that the $US18.20 figure for the "no recovery case" represented their assessment on 14 February 1986 of the average future base price of oil over the forecast period in the absence of an OPEC - non-OPEC agreement and that they still hold the view that that average figure will be realised. Of course it was and remains a forecast. A forecast is something which admits the possibility that the actuality may differ from the forecast. In current circumstances each shareholder of BHP who wished to make a wise decision in his own interests would be assisted by an informed opinion as to future profits. The respondents were able to supply an opinion of persons who had experience in and knowledge of the oil scene, and of persons with experience in and knowledge of the circumstances affecting the steel, coal exploration and other aspects of the business of BHP. Every shareholder would know that in relation to oil prices and the exchange rate the future is uncertain and world events undreamed of at the moment, might play a critical role. But the shareholder's decision must soon be made. He is required to make it by reference to his assessment of the value of his shares. They could not hope to have all the facts and considerations before them.

To give the shareholders a comprehensive statement of the multiple facts and circumstances and the reasons for drawing this or that conclusion was obviously impracticable. But the shareholders are entitled to have before them the company's assessment of its future prospects. The company may be expected to understand those prospects as well as and indeed better than other people and, unlike the applicants in this case, had a legitimate interest, and to my mind a duty, to inform the shareholders of what the company thought of its prospects. A forecast is defined in the Shorter Oxford Dictionary as "to estimate or conjecture beforehand, to consider of beforehand". Its value depends on the qualifications and experience of those who make it. It is not easy to visualise any source other than the Company having an interest in protecting shareholders from undervaluing their investment from whic h an informed forecast would be likely to originate.

The forecast was made against the background that each shareholder was likely to receive an offer of $7.70 per share for one half of his shareholding. This was evidence that the shares were worth at least $7.70 each and that the offeror considered them to be worth more than that. If shareholders did not sell they would be retaining something which on the evidence was worth $7.70. The shareholder's risk therefore was that he would sell for less than his shares were worth. It was against this risk that the shareholder needed protection. He needed to know the potential of his existing investment. It is only the respondents who have the interest and responsibility to inform the shareholders of the Company's potential. And more than ever was that necessary against the background of a current falling price of oil. The falling price of oil was widely understood throughout Australia and shareholders could not but be apprehensive about the effect of this on the future of the Company. It was necessary to inform shareholders that notwithstanding the current low price of oil it was the Company's view that for the 1986-87 period there was an anticipation that the oil price would rise and that profits would benefit accordingly. It was an intimation of this kind that would be likely to alleviate uncertainty and instability in the market.

Mr. Merkel Q.C. argued that the shareholders did not get the truth because the Company knew that certain persons, some in its employment, had expressed and held views more pessimistic than the expectation expressed in the forecast. But the forecast did not assert that there were no persons in or out of the Company who did not agree with the forecast. It said that the forecast was the expectation of the Board and the personal respondents. It was for the Board to arrive at its assessment of future prospects and it would seem that it did this in accordance with the Company's administrative procedures. Under these procedures it received the latest advice of the senior officers of each relevant division of the Company and accepted such advice. It would have been strange that in an organization as large as BHP there would not be divergent views on questions involving subjective judgments and assessments of facts and future possibilities. Acceptance of the advice of the senior staff, comprising experienced executives, who had considered all relevant matters including the divergent views known to them, could hardly be regarded as anything other than reasonable and responsible. The inference to be drawn is that the respondents did this. Certainly there is no evidence to the contrary.

Mr. Merkel went so far as to contend that the future was so uncertain and unpredictable that no forecast could be justified. I do not accept this. Thousands of people were being asked to part with valuable property in a commercial transaction arising from the applicant's assessment, expressed in a partial offer of $7.70 of the commercial realities made in the face of those same uncertainties. In the context judgment had to be made by a process of balancing future uncertain possibilities. In such circumstances commercial realities require recourse to the best experts available. Despite the uncertainties their conclusions have commercial value. It was entirely reasonable that the Company, being better placed than the shareholders to have an opinion of the commercial possibilities should give them the benefit of its opinion based on the opinions of their senior officers who were expert in the relevant fields.

Exchange Rate

It was the day to day business of Mr. McGregor to be aware of current exchange rates and the possible future development in relation thereto. Upon his recurring assessment of future trends transactions involving very large sums of money were regularly undertaken by the Company. Paper calculations were not needed because the sums involved were the day to day business of those concerned. They had the necessary knowledge and their assessment of future possibilities largely depended on judgment in relation thereto.

For one calculation made by Mr. McGregor he was subjected to criticism by Mr. Merkel. Mr. McGregor did include in the material to which he had regard in estimating the average exchange rate for 1986-87, namely, the calculation showing that the average fall in the rate from 1974 to 1985 was at the rate of 1.7% per quarter. Using this in a process of extrapolation into the forecast period the result gave an average of $US0.65 to $A1.00 for the 1986-87 year. It was said that this exercise was unscientific and unsupported by professional opinion. But Mr. McGregor is entitled to respect in using it in the circumstances. It was said by Mr. Merkel that no support for this method was apparent in any of the evidence.

But Mr. McGregor did not act merely by reference to this calculation. It is apparent from his evidence that he had regard to what all the expert witnesses said were pertinent, particularly for longer term predictions, namely, fundamental economic factors. Amongst those were the recent volatility of the exchange rates, likely movements in the U.S. dollar, inflation, movement in manufacturing capacity, the trade imbalance, interest rates in Australia and the likelihood of wage rises and Australian taxation and budget policy. These items are the daily fare of Mr. McGregor's business life. Mr. McGregor took these and other fundamental economic considerations into account and they moved him to the view that overall during the forecast period the dollar would continue its fall. In such circumstances it was quite reasonable to use as a guide the historical rate of fall during the previous ten years when the fundamentals were operating to cause a continuing fall.

Of all those experts who spoke of forecasting exchange rates Mr. McLeod holds a record for good results. I was most impressed by his evidence. He was obviously very skilled and experienced. He has made a forecast for the forecast period relevant to these proceedings. He was concerned that it be treated confidentially and that concern was respected by all. Suffice it to say that it does not contradict Mr. McGregor.

I accept Mr. McGregor's forecast as truly stated, skilfully made and based on reasonable grounds. As such it was appropriate for acceptance by the Company and the personal respondents for the purpose of a public profit forecast. It was referred to in the respondents forecast as the rate adopted for the forecast in terms which made it clear that it might differ from what would actually eventuate.

Shareholders were not told that the rate adopted for the forecast was anything other than a rate which was considered appropriate for the purposes of the forecast and that was true. If the forecast carried the implication that the rate adopted was adopted on reasonable grounds that was also true. The forecast terms indicated also that the forecast profit would change to what extent if the actual rate differed from that forecasted.

It was contended that the rate of exchange operating in the current futures market did not support Mr. McGregor's forecast of the average exchange rate for the forecast year. It put the Australian dollar higher. It would appear however that futures contracts depend on considerations special to them and are not a reliable guide to the actual exchange rate likely to prevail at any particular point in the future. This is illustrated by the fact that for the year 1984 the actual exchange rate was some thirty percent higher than was assumed for futures transactions.

It was also contended for the applicants that by reason of the circumstance that the forecast did not state the current exchange rate it was misleading or likely to mislead. I do not accept this. The observations hereafter concerning the non-statement in the forecast of the current base price of oil are equally applicable to the non-statement of the current exchange rate.

Professor Ball

In its attack on the propriety of the assumptions made in the forecast issued on 21 March 1986 in respect of the average oil price and the average exchange rates expected to apply during the 1986-87 financial year the applicants relied, in particular on the evidence of Professor Ball of the University of New South Wales. Professor Ball states in his affidavit of 16 April 1986 that he did not think that the assumed average oil price of $US18.00 or the assumed exchange rate of $US0.65 to $A1.00 could properly have been supported as at 28 February 1986 . He added that it was his opinion that the movements of oil prices and the exchange rate must have materially affected those assumptions. But Professor Ball also said that he knew of no basis for predicting a jump in oil prices which would lead to an average of $US18.00 per barrel as the base price for crude oil for the twelve months period ending 31 May 1987 . He said also that he knew of no basis upon which the forecast could rationally take as an assumption the 65 cent figure which was adopted in the forecast in question.

It is my view that such expertise as Professor Ball in relation to the oil market is not to be compared with that of Mr. Foster. One has only to refer to paras. 46 and 47 of Mr. Foster's affidavit of 22 April 1986 . And Professor Ball recognised in cross-examination that the view held by various commentators that there will shortly be an agreement between OPEC countries and even between OPEC and non-OPEC countries for limiting production and consequently raising prices is "a possible view". If so there is obviously a basis for the assumption in the forecast. To say that he knows of no basis is to put his case too high. The following passage in his evidence is relevant.

"DR PANNAM: Well, let us leave that for debate. I want to put to you what you just conceded as a theoretical possibility in agreement by the end of year, although it is a view that some commentators have that there might be an agreement within OPEC, you do not share it, but if there was, I am asking you some questions now about the effect that that would have on prices and you have said, 'Well, even if there was against my view prices would not go immediately through the roof,' in effect? - - - Are you talking about an agreement within OPEC or an agreement between OPEC and other oil producing nations.

Just within OPEC for the moment? - - - It is not clear that an agreement within OPEC would cause a price change of that order.

Yes. It is not clear to you. Other people might have a different view? - - - I understand that.

Yes. And if there is an agreement between OPEC and non-OPEC members again it is not clear to you that there would be an immediate substantial increase in price but you would expect it to be of some significance, is that right? - - - Yes.

Yes, I see. But the view that if there was an agreement between OPEC and non-OPEC producers, that view, would you agree that it is a possible view but one you would not share that spot prices for oil could double in a matter of days perhaps overshooting a new city state level of US $20 to $25 a barrel? Would you agree with that? - - - It is possible.

It is possible. I see. And would you agree that it is really possible to find commentators and participants in this industry who support a whole range of forecasts as to what might occur with the price of oil during the forecast period? - - - Oh, yes."

In addition it must be patently clear to a person acquainted with the oil market that there are elements resulting from the current fall in prices which have in them the potential to cause oil prices to rise in the near future and certainly as from May 1986. There is certainly a basis for forecasting by reference to those elements. Indeed as Mr. Foster said the greater the immediate fall in prices the more likely and the sooner is a substantial rise to be expected. The elements appear from the evidence of Mr. Foster, namely,

"HIS HONOUR: That is right. The question really is if you say $18 - apart altogether from that feature that it fitted that price you had in mind, apart altogether from that, the question is, is it a proper price to make a forecast on? - - - Yes.

And if it is here you are with falling oil prices all around you, lots of people pessimistic, and here you are - I do not say full of optimism, but exhibiting optimism to the extent that you think you will average out at $18. Well how could you come to that; how did you come to that conclusion, what factors influenced you? - - - Yes, sir.

Well away you go? - - - Your Honour, the price fall was engendered by the loss of patience by Saudi Arabia. It was them that engineered the glut, it was the Saudis that have engineered the price collapse, it is the Saudis that have engineered the fundamental change in the world market. The over-supply in the market, if we assume that there will be no overt agreement between OPEC and non-OPEC producers, the fundamental changes in this market will work out through certain ways that are inevitable, and the first of them is that production will be shut in, . . .

Shut in? - - - Shut in. There will be oil that is now in production that will not be produced, so non-OPEC production which is the competitor of OPEC production, will be reduced. Now, most of that shut in production will in the first case come from the United States. By the end of this year there is likely to be between five hundred thousand and one million barrels a day of previous production shut in in the States. United States production will fall sharply. Looking an an example nearer home, in the last half of last year our Gippsland fields here produced over five hundred thousand barrels a day.

In January this year we sold five hundred twenty-four thousand barrels a day. Already what is happening in the US and around the world is happening here. In February we sold less than five hundred thousand barrels a day, in March, we sold less than four hundred thousand barrels a day, and that will be the same in April, so one of the factors that will drive the recovery in prices is quite clearly established, and that is that production is falling in those countries that compete with OPEC.

The next factor is that because of the lower prices, oil that is already discovered and is scheduled for development, will have its development deferred. This will happen in the United States, it is happening in the North Sea and other places, and to come back close to home we have an announced development programme here of $1,800m of new oil fields development in Gippsland. We have announced quite recently since the price drop that one thousand million of that is deferred. That is new, non-OPEC production that is not going to come on while prices are at these low levels.

The third thing that will happen because of these lower prices, and I might add the lower the better in the short term so far as I am concerned, because it drives things faster, drives the inevitable recovery faster, the third thing that will happen is non-OPEC exploration will collapse and has collapsed. Half the exploration rigs in the States have gone out of business in the last few months. In OPEC there has been nearly no exploration for many years. Coming close to home, in Gippsland we are prematurely stopping - have stopped our own exploration stream. It stopped about a week ago. We now have no exploration in Gippsland. Now, on the Timor Sea side where our other big programme is, we were going to bring a second rig on in the third quarter. We have now dropped that idea. It is a direct result of the price. The only rig drilling for us in the Timor Sea probably we will stop that also during the course of this year, and this is happening worldwide. So on the supply side matters are taking care of themselves and the lower the price goes the faster it will happen. It is happening quite fast.

One reason why I think a lot of people have not realised this is because a lot of the forecasts are being made by economists not by, let us say, oil industry engineers who can see the realities.

Now, on the other side, on the demand side, things are also changing. There is no doubt that the trend of substitution out of oil has been arrested, particularly in the States. Oil is being used more in stationary uses, such as power generation, so there we have a change to higher demand. Conservation is not being pressed as zealously now as it was a few months ago, so substitution back into oil is taking place. Conservation is less strongly pursued than it was.

These two factors are going to change the forecast supply/demand balance by the end of the third quarter when the winter demand growth comes probably between them by something like two million barrels a day. It is my strong belief that the two million barrels a day extra for OPEC to sell by the third quarter this year will be quite enough for them to be able to come to an agreement which balances supply and demand, albeit a lower price, than would have been the case than if they had the non-OPEC producers with them, and could have tightened things up.

There is also another factor, once the market decides that OPEC can do it, the dreadful de-stocking of the last four years will come to an end - - - People have been taking something like a million barrels a day out of stocks, which is crude oil that they would otherwise buy, which means that we will lose the de-stocking and we will also, because people will be convinced that prices are going up, they buy for stock, which is exactly what happened in 1979, and will cause the second oil shock. Stocking will replace de-stocking. I do think that for that reason two million barrels a day turnaround at the end of the third quarter is conservative. I think there is little doubt that by the end of the third quarter without the co-operation of non-OPEC countries that the OPEC producers ought to be able to hold the price of $18 a barrel. There are many people that think that, I mean there are the published - Sheikh Khoumani and a number of people have said it, but I am thinking of my own view, and I think that the lower the prices goes in the interim - - -

When you said $18 a barrel there you meant their $18? - - - US dollars a barrel, yes, and I am not saying an IPP of $18 specifically but a world price of about $18 a barrel, so I think that there is a very good chance indeed that we will get that price and if prices fall further in the interim my confidence is reinforced.

DR PANNAM: When do you think that figure of $18 a barrel in the market would be achieved? - - - I would think by end third quarter.

After that what would be your view as to what would happen to the prices? - - - The view we have used is an average of 18 for the year in our no recovery case but of course that will be by the prices going through 18, up into the 20s and then sagging back to the 18 because the destocking will take prices through. Spot prices will go right through that level."

Of course experts may differ as to the possible effects of all these elements but for an expert to say that there was no basis for the forecast indicates a failure to observe fundamental considerations. Professor Ball referred to the possible effects of the Iran-Iraq war, the problems found by the British Government in balancing its budget, the problems faced by the Government of the USSR in relation to foreign currency, the internal problems of Indonesia and the foreign trade problems of Nigeria, as factors pointing towards a continuance of low oil prices. But he provides no analysis of these problems. However, an analysis is provided by Mr. Foster and his comments are worth noting. He said:

"(a)

A settlement of the Iran/Iraq war would enable the participants to repair war damage, and the end result would be an increased ability to export crude oil from gulf loading ports. There is, however, no evidence to suggest a settlement of that war is imminent. In my opinion a much more likely outcome is that the war drags on, or even expands to engulf nearby oil producing states along the lines of Colonel Qadhafi's forecast. Now shown to me marked 'RJF29' is a true copy of an article from the Middle East Economic Survey of 3rd March, 1986 containing a transcript of an interview with Colonel Qadhafi.

(b)

The British Government has been able to resolve its budget brought down on 18th March, 1986 to the general satisfaction of commentators despite the reduction in oil revenue. Now shown to me marked 'RJF30' is an article from the Sunday Times of 6th April, 1986 commenting on the successful resolution of budget problems brought about by the reduction in oil revenue.

(c)

Turning to the USSR foreign currency problems: Soviet crude oil exports to the West plunged by 22% and refined product exports by 5% in 1985, for a weighted average decline of some 16%. Soviet crude oil production fell for the second year in succession to 597 million tonnes in 1985, well below the Government target of 628 million tonnes. One of the reasons appears to be a previous policy of maximum current production in order to meet targets at all costs, rather than optimization of long term production rates to ensure maximum ultimate recovery. This technical neglect can be overcome, to some extent, by urgent additional capital investment. However timely delivery of needed equipment can only be through purchase from the West. The foreign currency problems of the USSR may therefore have the effect of curtailing, rather than stimulating oil production. Now shown to me marked "RJF31" is a copy of an article from the Wall Street Journal of 24th February, 1986 which comments upon the declining Soviet oil output and the problems that poses for the USSR.

(d)

Indonesia's problems: Indonesia's internal problems and its desperate need for oil revenue is well known. Nevertheless, the revenue needed cannot be obtained simply by producing to maximum capacity at very low prices. The world oil market cannot grow rapidly enough, nor is Indonesia's current production capacity sufficiently large. Additional expenditure on exploration and development will be needed in order to increase production, and at low oil prices it will not be forthcoming. In my opinion Indonesia does understand that only shared production restraint will lead to higher prices thus providing the revenue that the country needs. This is evidenced by the second quarter production sharing arrangements devised by the Indonesian Oil Minister, Dr. Ali Subroto, at the March OPEC meeting. Now shown to be marked 'RJF32' is a table obtained from the Middle East Economic Survey of the 31st March, 1986 showing the proposals put by the Indonesian Oil Minister, and an article from Oil and Gas News of 11th April, 1986 which refers to the difficulties involved.

(e)

Problems of Nigeria: Prior to the change of the regime, the Nigerians had favoured counter-trade as a means of financing capital projects and imports of consumer goods, although negotiation of new counter-trade deals seems generally in abeyance at the present. The new Nigerian Oil Minister, Alahji Rilwanu Lukman, has made it clear that his country is ready to co-operate with other parties in balancing world supply and demand. This is indicated in a quotation by the Haji which was contained in the 16th March, 1986 edition of the Middle East economic Digest, now shown to me and marked 'RJF33'."

I find those comments and the opinion of Mr. Foster on the main problem very persuasive.

Professor Ball indicated that in his opinion the fall in prices occurring in January and February and up to 21 March 1986 was significant to a shareholder attempting to form an opinion as to the likely level of profits over the year of forecast. Based on this the applicant contends that a forecast on 21 March 1986 of the average prices for the year 1 June 1986 to 31 May 1987 was misleading or deceptive unless the precise levels of the most recent prices were stated therein. Of course the level of the oil price at March 1986 was a matter to which a forecaster of 1986-87 prices had to have in mind. But its relevance to the forecast was that it was merely one item in a number of items to be considered. Stated by itself it was more likely to mislead than to inform. As Mr. Foster said:

"(a)

As to paragraph 6(8): the price changes over the three weeks to 21st March, 1986 could not affect the IPP for 1st March, 1986, as it was calculated from prices prevailing in the first two weeks of February, 1986. Also changes applying over the period to 21st March, 1986 to world oil prices do not alter my forecast for the average 1986/87 base price. In my opinion it would have been misleading and confusing to shareholders to inform them of the daily movement in oil prices since 24th February, 1986 or some of them. The then prices had little relevance to the forecast price of crude for 1986/87 and if given prominence could have led shareholders to believe, mistakenly in my view, that the average price in 1986/87 would be influenced by price movements in a three week period in early 1986. To put those price movements into their proper context so that a shareholder would not have been misled or confused by them, it would have been necessary to also provide the shareholder with similar background material in content and range as contained in this affidavit.

(b)

As to paragraph 7: I disagree with Professor Ball's statement that it is necessary to refer to immediately contemporary price data when forecasting the average price of crude to apply in a future year. Historically the price of oil has been extremely volatile. In 1973/4 the price of crude quadrupled, in 1979/80 price trebled, and in the first half of 1986 price halved, as shown in Exhibit "RJF7". Thus it would be extremely dangerous to rely in all circumstances upon the immediate contemporary price of oil when forecasting prices a year ahead."

On the matters in issue I do not doubt that the opinion of Mr. Foster on all the relevant matters is to be preferred to that of Professor Ball. I accept the opinion of Mr. Foster and Mr. Leigh as to the likely course of oil price levels for the 1986-87 year. The battle waged before me about the $US18.00 forecast was based on what was to be expected if there were no agreement between the OPEC members and non-OPEC members before the middle of August 1986. Mr. Foster and Mr. Leigh believe that such an agreement will eventuate and they give their reasons therefor. If it does the profit for the year would be considerably higher than that stated. Much has been said about the desirability of the Company acting conservatively. It acted conservatively enough to refrain from stating what might have been the chances of the profit being boosted in the event of an OPEC or non-OPEC agreement eventuating.

The forecast did indicate that there had been a sharp fall in the level of the oil prices. By indicating the effect upon the forecast of the actual average price falling or the exchange rate moving one way or the other, shareholders would understand that the actuality in 1986 might not accord with the price and exchange rate adopted. What was being communicated to shareholders was the company's opinion not a treatise.

It is said that the forecast of profit was in bold type and might give an impression that the forecast was more reliable than it really was. Once the Company was satisfied that the forecast reflected its real expectation of profit for the relevant period and believed it to be based on reasonable grounds there was no reason not to print it in bold form. I think the proper inference on the evidence is that the company and the personal respondents did have this satisfaction and belief. But certainly, the evidence does not satisfy me, on the balance of probabilities or otherwise, that the Company did not have such satisfaction and belief or that the forecast was not based on reasonable grounds.

For the reasons expressed herein I would dismiss the application and order that the applicants pay the respondents' costs of this application including reserved costs.